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The evidence of market conditions at that time did not show this decision of HBOS or the auditor's assessment of it to be unreasonable at the time

Financial Reporting Council

The decision will come as a relief to KPMG, which has also been drawn into a mounting scandal in South Africa over its work with the politically connected Gupta family.

KPMG launched a probe 15 months ago into KPMG's HBOS auditing in 2007 amid worries over whether the accountancy giant properly considered whether HBOS was a going concern in its 2007 accounts.

Former Treasury Select Committee chairman Andrew Tyrie said at the time that the FRC probe was welcome but overdue.

HBOS was taken over by Lloyds TSB in a rescue deal in the autumn of 2008 after expanding too quickly with risky lending, weak funding and management failures.

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The investigation into KPMG's handling of HBOS's accounts was closed

Lloyds then had to be bailed out with £20.5 billion of taxpayer cash in 2008.

HBOS, formed from the merger of Halifax and Bank of Scotland in 2001, had said in 2008 it would be able to fund itself and did not expect market conditions to worsen, according to the FRC.

KPMG "considered and accepted this conclusion" and HBOS published its accounts in February 2008 on that basis, the FRC said.

The FRC added: "The evidence of market conditions at that time did not show this decision of HBOS or the auditor's assessment of it to be unreasonable at the time.

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KPMG was pleased that the FRC had reached the conclusion

"The extreme funding conditions which arose in October 2008 were not anticipated."

The FRC said it conducted a "thorough" investigation, which saw it liaise with other regulators and gather expert advice from independent and experienced lawyers and audit professionals.

KPMG said: "We are pleased that the FRC has reached this conclusion after a thorough investigation.

"We have always maintained that our audit was robust and undertaken in accordance with the regulations and practice of the time."

It added industry-wide efforts have been made to improve auditing of banks.

The FRC said it would publish a report next month on its actions to improve audit and corporate reporting since the financial crisis.

Nicky Morgan, current chair of the Treasury Select Committee, said: "When it publishes its detailed report next month, the committee will expect the FRC to provide a full explanation of its decision not to take further action against KPMG. It may take further evidence in due course."

A damning review of the HBOS saga by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), which was published in November 2015, put the blame firmly on the bank's executives.

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HBOS had said in 2008 it would be able to fund itself

It said they were "ultimately responsible" for the demise of HBOS.

Only one former HBOS executive, Peter Cummings, has so far been punished.